Essay Title: 

Phuket Beach Hotel case study

April 2, 2016 | Author: | Posted in finance, mathematics and economics

p 1 Located at Patong beach , Phuket Beach hotel has some underutilized space . The hotel has an option of outsourcing this space to Planet Karaoke Pub for a monthly rental income . Alternatively , the hotel can build a pub itself as such pubs are fast spreading in Thailand and attract many new customers and growing income for itself

Such capital investment decisions are the very vital decisions for any organization as it will have to live with its effects for many years . A comprehensive study is required to decide which of the proposed [banner_entry_middle]

project is going to be most profitable in the long-run . All investment alternatives need to be studied completely and all the pros and cons should be listed to enable the company owners to make appropriate final decision

Thus , for such decisions , Capital budgeting is done which help the organization select which expenditures will generate higher income over the multi-year period

After doing capital investment analysis for the two proposed investment plans , the Planet Karaoke Club project seems to be more feasible Although the Beach Karaoke Pub project is more monetarily rewarding , it is also more vulnerable to various threats and projects negative EACF under such situations . Planet Karaoke Club project is also more attractive because it guarantees fixed rental income for 4 years of the project life , where as the income is uncertain for the other project

Beach Karaoke Club stands the benefit of recruiting the internal excess and already trained staff . If the transfer is efficient , it will have a zero opportunity cost . But there is a possibility of shortage in manpower due to the large new project , and hiring of staff brings with itself increase in the costs . Hotel ‘s revenue will also be affected due to any negative affect on the sale of the rooms . This in turn will also have an impact on the operating expenses related to the room , which is directly proportional to the room sales . The initial investment for this project will be of decor , furniture and equipments . Salary costs , food and beverage costs , repairs and maintenance costs will be the major expenses for this project along with other operational expenses

In this analysis , only incremental cash flows are relevant . This is why interest payments are not taken into consideration . Even depreciation is deductible for tax purposes and do not account for cash flows

These two mutually exclusive projects can be ranked through various assessment criterions . On the basis of given capital information , an 11 .10 of weighted average cost of capital is computed . Same is used for discounting all the cash flows in the projects . Equivalent Annual Cash Flow method (EACF ) is used to compare the two projects more effectively with regard to length and time . This method is so designed to provide for the time value of money . The four other suggested criteria are also used but they have there own flaws , where as , EACF provides with accurate results for calculating the actual economic growth on yearly basis for the… [banner_entry_footer]

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